Continuing from Part 1, I’m talking about six serious mistakes I’ve seen made over and over in pitch decks, and how to nail these before approaching anyone for financing.
4. Align the Type of Capital You Need with Your Investors
This is pretty straightforward. If you are going to go raise $X, what types of investors are looking at providing that amount of money to your stage of company with your type of product? This is the time to hone in on what type of capital you need based on who you are as a company today. It’s important to understand that this gets into pricing and valuation, but also into the expected return for each investor. Do you have a way to illustrate to them how they get their expected return?
That question applies to both equity and debt financing. A debt holder may say, “I can’t take a loss, I can’t get deferred. I need to make sure this business is solid.” An equity investor will be asking, “How am I getting my money out of this at some point?” What we suggest for our clients here at AVL is building what we call a pro-forma cap table early on and keeping it updated. This document says when are you going to need what kind of capital? What investors are going to come in, equity or debt? This table also shows how you will get a return for those investors, and which assumptions their market return is based on.
That step helps make sure you’re talking to the right group. Angels are different from VCs are different from private equity. Commercial banks, asset-backed lenders, mezzanine debt lenders—all different. So this point is about setting up your capital raise with the right group, tailoring it to that group, and making sure you’re being efficient in talking to the right investors for your investment and making sure it makes sense.
5. Build a History of Stakeholder Communications
This one is a hot button for me, and I think it’s a super easy thing to do that can pay off brilliantly. Very few CEOs do a good job at this, so you can really stand out here. I just met with an entrepreneur last week who was having these conversations and I compelled him to communicate with all his stakeholders. That can be friends, family, vendors, bankers, and those you want to know, the potential investors.
What I have companies do is start, early on, writing a one-page monthly email that has four essential parts:
- Measurable milestones. What is my progress and what are the milestones that I’ve achieved or that I have insight that we’re going to accomplish? This part demonstrates that you’re executing what you say you’re going to do.
- Customer sales and traction. Do you have any customers? How are sales trending? Are you on plan? You don’t have to disclose numbers per se, but tell them you’re at 80% of your target for the quarter. People are likely to say, “I don’t care what that number is; this company is executing, and I want to keep informed.”
- Product and technical. Are you adding new features? What technical issues are you running into? How’s it going?
- Asks. This one can work magic. You’re keeping your investors informed, and you’d be surprised whom they know. So let them know what you need: “We really need a director of marketing with these skills. If any of you know somebody like that, I’d love an introduction.” Or perhaps: “We’re going to be raising investment capital, looking for about a million dollars of angel capital in the next six months. If you have people that would be interested in what we’re doing, I would love an introduction.”
I’ve seen three or four companies do this. One struggled in terms of their product, it took a while to succeed, but because they demonstrated tenacity over a period of months and months, the folks that were following them had a history and hung in there. It changed the outcome of how they were able to raise capital when they found their customer niche and a unique market and jumped into that market successfully. Then things started to change and I think it was all because of this stakeholder communications update that they stayed dedicated to for months and months. They were very honest and admitted when they were behind, found a bug, screwed up, or were three weeks behind on plan. It was amazingly vulnerable, and that created a lot of integrity for the shareholders or for the founders as they were going out to the market.
This communication strategy works in a bank situation too. If you’re talking with different types of bankers, it’s really important to talk to them well in advance of needing anything. That’s more of a: “Hey, I just want to keep you up to date, I don’t need anything right now, but I think the right thing is to eventually have a good firm loan with you so I can continue to grow and do XYZ. Not now, but I want to keep you in my inner circle, my circle of trust.
I’ve seen this tactic pay huge dividends down the road.
6. Know How You Will Return Investors’ Money
I don’t want to get too complex here, but being able to clearly communicate to an investor exactly how they can achieve their returns is going to bring you tremendous credibility.
Before you even get into a funding conversation, you need to have a plan for how you are going to get investors’ money back to them once you get it. This one differs between equity and debt. Equity is super illiquid. Sometimes an investor will ask, “What’s your exit strategy?” What they are really trying to say is how should I think about when and how I’ll get my return on my investment? If their required return is 100% or 4x, or 15% back in the next months/years, know exactly how you will get there.
You need to clearly illustrate how that happens, and where the value is. I don’t necessarily want to hear that it’s going to be an M&A strategy and here are the companies that might acquire us. Show the value created. You need to show your investors a trajectory here, so that at a point in the future, say three years from now, if they choose to do so, they could get their money back out.
Even structuring the deal in terms of how an investor gets their money out creates some options.